Will banks suffer from the escalating trade tension?
Some also flagged potential dampening effects on investments and business sentiment as early as the second quarter of 2018.
Singapore’s commercial banking sector is firing on all cylinders, as seen from the strong Q118 results of DBS, OCBC, and UOB, and we are positive on the sector’s outlook over the coming quarters. Healthy loan growth, stable asset quality, and well-capitalised balance sheets are tailwinds for the city’s banks.
Cause for optimism
We remain optimistic on the prospects of the Singapore commercial banking sector over the coming quarters as it is likely to benefit from relatively healthy loan growth, stable asset quality, and robust capital adequacy. Indeed, Singaporean banks are performing well, according to Q118 results released by the city’s three biggest local banks, DBS, OCBC, and UOB. Their respective net profits grew by 26% y-o-y, 14% y-o-y, and 21% y-o-y to $1.5b, $1.1b, and $978b. The equities of these three financial institutions have also achieved strong gains, averaging 36.4% in terms of price increase over the past 12 months, and they remain on an uptrend.
Data from the Monetary Authority of Singapore showed that total credit extension via DBUS (representing loans denominated in Singapore dollars) expanded by 5.4% y-o-y in March (versus 5.6% y-o-y in December 2017), and we are forecasting credit growth to come in at 6.4% in 2018. Loans to businesses (which account for roughly 60% of overall credit) will continue to be the key driver over the coming quarters.
Whilst growth in the manufacturing sector will likely moderate, the Singapore government’s expansionary budget for 2018 will likely provide considerable support, as the government remains committed to planned infrastructure upgrades to ensure that Singapore is able to maintain its competitiveness, Construction and building loans account for 18.5% of overall loans, and are likely to recover from the
0.4% y-o-y contraction in March as upgrading projects are rolled out over the coming months.
In addition, the services sector continues to expand at a steady rate, supporting related loans. Indeed, Singstat’s Q218 Business Expectations (Services Sector) survey showed that a net weighted balance of 8% of firms expect more favourable business conditions for the period from Aprsep 2018 compared with Oct 2017Mar 2018 (versus 3% in the previous survey).
Furthermore, Singapore’s property sector is showing some signs of picking up due to pent-up demand, and this is likely to provide support to housing and bridging loans, which account for 30.5% of overall loans (and more than 75% of all consumer loans). Indeed, the overall URA private residential property price index rose by 3.9% q-o-q and 5.4% y-o-y in Q118 (versus 0.8% q-o-q and 1.1% y-o-y in the previous quarter)
Stable asset quality
Singapore banks have largely moved past the issue of deteriorating asset quality due to the stress facing the oil and gas sector amidst a recovery in the global crude oil prices, and we expect non-performing loans (NPL) to remain largely stable over the coming quarters. According to the financial reports of
DBS, OCBC, and UOB, the average NPL ratio for these three banks remain generally low, and fell to
1.57% in Q118 from a high of 1.64% in the previous quarter. With asset quality stabilising, this suggests that the amount of loan loss provisioning that banks have to set aside over the coming quarters will be lower, which should be positive for profitability. Indeed, the average allowances to non-performing assets declined to 85.4% in Q118 from 104.5% in Q217, as banks have also taken advantage of a switch to a new accounting standard that allowed banks to draw down funds from their general provision reserves to cover large allowances for certain soured loans. The risks to our banking sector outlook is weighted to the downside, mainly due to escalating trade tensions between the US and China. Singapore’s small and open economy makes it susceptible to changes to the global trade outlook, and a potential trade war could significantly dampen exports, economic and loan growth, and could also result in worsening asset quality. From BMI Research
A trade war between the two largest economies in the world will have a big, negative impact on Singapore.
Healthy loan growth, stable asset quality, and well-capitalised balance sheets are tailwinds for the city’s banks.